URBANIZATION AND RURAL-URBAN MIGRATION: THEORY AND POLICY

I. URBANIZATION: TRENDS AND LIVING CONDITIONS

Urbanization rates increase whenever urban population growth exceeds rural population growth. The positive
association between urbanization and per capita income is one of the most obvious and striking “stylized facts” of the
development process.

At the same time, while individual countries become more urbanized as they develop, today’s poorest countries are
far more urbanized than today’s developed countries were when they were at a comparable level of development, as
measured by income per capita.

Urban bias. The notion that most governments in developing countries favor the urban sector in their
development policies, thereby creating a widening gap between the urban and rural economies.

Rural-Urban Migration. The movement of people from rural villages, towns, and farms to urban centers (cities)
in search of jobs.

A critical issue that needs to be addressed is the extent to which national governments can formulate development
policies that can have a definite impact on trends in and the character of urban growth. It is clear that the emphasis
on industrial modernization, technological sophistication, and metropolitan growth created a substantial geographic
imbalance in economic opportunities and contributed significantly to the accelerating influx of rural migrants into
urban areas

II. ROLE OF CITIES

To a large degree, cities are formed because they provide cost advantages to producers and consumers through
what are called agglomeration economies.

Agglomeration economies. Cost advantages to producers and consumers from location in cities and towns,
which take the forms of urbanization economies and localization economies.

TWO FORMS OF AGGLOMERATION ECONOMIES

Urbanization economies. Agglomeration effects associated with the general growth of a concentrated
geographic region.

Localization economies. Agglomeration effects captured by particular sectors of the economy, such as finance
or autos, as they grow within an area.

An economic definition of a city is “an area with relatively high population density that contains a set of closely related
activities.”

Industrial Districts: Clustering of firms of same type.

Localization economies encourage emergence of industrial districts. Clustering also has spill-over benefits:
a. Flexible Specialization: greater opportunity to contract outworks
b. Learning: firms can more easily learn from each other regarding production processes, business practices,
rules and regulations, business opportunities
c. Training and Technological Development: easier to develop training facilities; easier to develop, learn and
adopt new technologies.
d. Social Capital: easier to resolve shared concerns through collective action.

Industrial districts are quite common in developing countries. These districts/cluster produce traditional goods such as
handicraft as well as sophisticated goods such as computer software (e.g. Bangalore in India), surgical equipments.
Some industrial districts are very vibrant and dynamic, but some are not. Whether an industrial district succeeds or not
depends on other enabling factors such government rules and regulations, well functioning credit market, transport
links etc.

Efficient Urban Scale. There are also diseconomies of agglomeration. Additional competition drives down pricing
power. Large cities attract problems of crowding and congestion. There is trade-off between these economies and
diseconomies which determines the optimal city size.

Hierarchy of Cities Usually, in any country there are more than one cities. Some are big and some are small. What
explains the emergence of cities of different sizes in a country?
There are two theories:
a. Urban Hierarchy Model (Central Place Theory)
It is a geographical theory that seeks to explain the size and spacing of cities. Idea is that cities emerge
to provide goods and services. Bigger cities provide higher order of goods and services (more durable,
valuable and variable) as well as variety of goods and services compared to smaller cities, hence the
term hierarchy.

The theory relies on two concepts: threshold and range.

i. Threshold is the minimum market (population or income) needed to bring about the selling of a
particular good or service.
 ii. Range is the maximum distance consumers are prepared to travel to acquire goods - at some
point the cost or inconvenience will outweigh the need for the good.

The main prediction of the model is that goods and services with higher threshold and range are only located in big
cities. Small cities only provide goods and services with lower threshold and range

b. Differentiated Plane Model.

In this model transport cost plays a critical role. Idea here is that rms locate where the transport cost is
minimum. This depends on the available transport links and the nature of industrial products in terms of
inputs and output. Firms with strong forward and backward linkages tend to locate in the same city.
Primary processing industries with few inputs tend locate near the source of primary input. Places with
favorable transport links (rail-heads, ports) attract rms.

III. URBAN GIANTISM PROBLEMS

Urban Giantism. The previous model suggests that in a country with poor transportation network, there might
emerge one or two big cities. Most of the firms and economic activities might be concentrated in one or two big cities.
This may not be efficient from the social point of view. By diversifying the location of firms and economic activities
one can reduce the cost of production and commuting as well as congestion. Urban giantism may lead to first-city
bias, in which the biggest city receives a disproportionate share of public investment, which aggravates the problem
of urban giantism.

Causes of Urban Giantism

a. Colonial legacy
b. Industrial policy of import-substitution and high tariff
c. Lack of democracy
d. Rent seeking behavior of public officials/politicians

IV. URBAN INFORMAL SECTOR

One striking feature of the urbanization in developing countries is the presence of a large informal (unorganized,
unregulated, unregistered) sector. Between 30% to 70 % of urban labor force works in the informal sector.

The main characteristics of the urban informal sector jobs are:

a. low skill
b. low productivity
c. self-employment
d. lack of complementary inputs particularly capital
e. small scale measured in terms of sales, assets, employment etc.
f. favored by recent migrants

Advantages of Encouraging Urban Informal Sector

a. Informal sector has higher productivity than the rural sector and generates more surplus. This surplus
can be utilized to promote the formal sector.
b. It has low capital-intensity. This sector is quite suitable for the factor endowment of developing
countries (relatively scarce capital and abundant labor). It can create employment opportunities much
faster.
c. It provides learning experience for both wage workers and self-employed and thus enhances human
capital.
d. It generates demand for unskilled and semi-skilled workers which are again relatively more abundant
in developing countries.
e. Since, poor are concentrated in the informal sector, its promotion would ensure more equitable
distribution of the benefits of development and faster reduction in poverty.

Disadvantages of Encouraging Urban Informal Sector

a. Increased migration and aggravating the problem of urban giantism.
b. Increased urban unemployment.
c. Discrimination against formal sector bad in the long run.

Policies to Encourage Urban Informal Sector

a. Remove policies which discourage informal sector.
b. Provide information and training facilities.
c. Increased access to capital and credit

V. MIGRATION AND DEVELOPMENT

Migration worsens rural-urban structural imbalances in two direct ways.

First, on the supply side, internal migration disproportionately increases the growth rate of urban job seekers relative
to urban population growth, which itself is at historically unprecedented levels because of the high proportion of well-
educated young people in the migrant system. Their presence tends to swell the urban labor supply while depleting
the rural countryside of valuable human capital.

Second, on the demand side, urban job creation is generally more difficult and costly to accomplish than rural job
creation because of the need for substantial complementary resource inputs for most jobs in the industrial sector.
Moreover, the pressures of rising urban wages and compulsory employee fringe benefits in combination with the
 unavailability of appropriate, more labor-intensive production technologies means that a rising share of modern-
sector output growth is accounted for by increases in labor productivity. Together this rapid supply increase and
lagging demand growth tend to convert a short-run problem of resource imbalances into a long-run situation of
chronic urban surplus labor.

VI. ECONOMIC THEORY OF RURAL-URBAN MIGRATION

Todaro migration model A theory that explains rural-urban migration as an economically rational process despite
high urban unemployment. Migrants calculate (present value of) urban expected income (or its equivalent) and move
if this exceeds average rural income.

To sum up, the Todaro migration model has four basic characteristics:
1. Migration is stimulated primarily by rational economic considerations of relative benefits and costs—mostly
financial but also psychological.
2. The decision to migrate depends on expected rather than actual urban-rural real-wage differentials, where the
expected differential is determined by the interaction of two variables, the actual urban-rural wage differential and the
probability of successfully obtaining employment in the urban sector.
3. The probability of obtaining an urban job is directly related to the urban employment rate and thus inversely related
to the urban unemployment rate.
4. Migration rates in excess of urban job opportunity growth rates are not only possible but also rational and even
likely in the face of wide urbanrural expected income differentials. High rates of urban unemployment are therefore
inevitable outcomes of the serious imbalance of economic opportunities between urban and rural areas in most
underdeveloped countries

Harris-Todaro model. An equilibrium version of the Todaro migration model that predicts that expected incomes will
be equated across rural and urban sectors when taking into account informal-sector activities and outright
unemployment

Labor turnover Worker separations from employers, a concept used in theory that the urban-rural wage gap is
partly explained by the fact that urban modern-sector employers pay higher wages to reduce labor turnover rates and
retain trained and skilled workers.

Efficiency wage The notion that modern-sector urban employers pay a higher wage than the equilibrium wage rate
in order to attract and retain a higher-quality workforce or to obtain higher productivity on the job.

Five Policy Implications

First, imbalances in urban-rural employment opportunities caused by the urban bias, particularly first-city bias, of
development strategies must be reduced.

Second, urban job creation is an insufficient solution for the urban unemployment problem.

Third, indiscriminate educational expansion will lead to further migration and unemployment.

Fourth, wage subsidies and traditional scarcity factor pricing can be counterproductive.

Finally, programs of integrated rural development should be encouraged.

VII. COMPREHENSIVE URBANIZATION, MIGRATION, AND EMPLOYMENT STRATEGY

Elements of Comprehensive Migration and Employment Strategy

a. Creating an appropriate rural-urban economic balance.
b. Expansion of small-scale, labor-intensive industries.
c. Eliminating factor-price distortions.
d. Choosing appropriate labor-intensive technologies of production.
e. Modifying the linkage between education and employment.
f. Reducing population growth.
g. Decentralizing authority to cities and neighbourhoods.